How is the Consumer Price Index (CPI) used?

The Consumer Price Index affects nearly all Americans because of the many ways it is used. Three major uses are:

As an economic indicator: The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and other private citizens, and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.

As a deflator of other economic series: The CPI and its components are used to adjust other economic series for price changes and to translate these series into inflation-free dollars. Examples of series adjusted by the CPI include retail sales, hourly and weekly earnings, and components of the national income and product accounts. An interesting example of this is the use of the CPI as a deflator of the value of the consumer's dollar to find its purchasing power. The purchasing power of the consumer's dollar measures the change in the value to the consumer of goods and services that a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer's dollar declines.

As a means of adjusting dollar values: The CPI is often used to adjust consumers' income payments, for example, Social Security; to adjust income eligibility levels for government assistance; and to automatically provide cost-of-living wage adjustments to millions of American workers. The CPI affects the income of about 80 million persons as a result of statutory action: 48.4 million Social Security beneficiaries, about 19.8 million food stamp recipients, and about 4.2 million military and Federal Civil Service retirees and survivors. Changes in the CPI also affect the cost of lunches for 26.5 million children who eat lunch at school, while collective bargaining agreements that tie wages to the CPI cover over 2 million workers. Another example of how dollar values may be adjusted is the use of the CPI to adjust the Federal income tax structure. These adjustments prevent inflation-induced increases in tax rates, an effect called "bracket creep".